A big shout out to Eric Leonard for providing today’s guest blog on the 203K loan program.
What is a 203k Loan?
FHA offers a unique rehabilitation opportunity called a 203k loan. This home mortgage allows borrowers to purchase or refinance an owner occupied residence and escrow repair costs into the loan. Although there are specific details and minimum standards that must be met, the 203K loan process is quite simple. The following represents a typical 203k Purchase. (a re-finance transaction follows similar steps)
- Pre-qualify the borrower for an FHA loan (the 203k has the same credit requirements).
- Get the home under contract (for a re-finance, order a standard as “is appraisal” to establish value).
- Borrower gets contractor bids for the improvements to be done.
- “After improved” 203k appraisal is ordered.
- Once the appraisal is ordered, and all loan conditions are met, the loan is closed.
Delays are typical with a 203K loan. Why? Buyers and sellers need to be prepared to wait for acceptable bids regarding the “after improved” appraisal.
What sort of options are there for a 203K Loan?
There are 2 different 203k loan programs, which are quantified by the dollar amount of repairs and type of work.
- Streamline 203k- repair bids cannot exceed 30k and no major, or structural work (typical applications Most commonly cosmetic or home major functions of the home which might include: new kitchen, bath, flooring, carpet, paint, HVAC, Roof, Windows, etc.
- 203k Full- this program allows the borrower to borrow the max loan allowed by FHA. For example, if FHA loan limits are 417K, and the borrower qualifies for the full amount. 417k max loan, less the purchase price 275K, leaves $142k for repairs allowed for the program. The Full 203k is best utilized by, additions, like bedrooms, bathrooms, and attached and detached garages or any Streamline 203k which is over the 30k limit.
It is important to understand that FHA, our local Denver HOC (our local FHA office) and each individual lender all have their own “overlays.” Overlays are additional requirements for loan approval. Check with your lender before entering into a 203k contract to find out the specific requirements for borrowers and minimum requirements for contractors, bids etc.
If you have any specific question please feel free to email me at Eric203k@ulc.com or contact me via the comments section below. Get Eric’s info here.